Wheat and Cotton Prices Should Stay Strong

Wheat and cotton growers can look forward to strong prices at least through winter, and cotton prospects look favorable through 2011.

USDA's December supply-demand estimates put this season's ending stocks of all wheat at 858 million bushels and the season-average farm price at $5.30 to $5.70/bu. Unfavorable weather in major exporting countries tightened supplies and drove up premiums for milling-quality wheat.

Cotton prices soared in recent months to more than $1/lb. after dwindling stocks in recent seasons collided with rising demand. USDA projects the 2010-11 average farm price at 76 to 86 cents per pound, up from 62.9 cents last season and 47.8 cents of 2008-09.

Competition for acreage will keep prices strong this winter for cotton, corn, and soybeans, and those will buoy wheat prices, says Tim Emslie, research manager at Country Hedging, St. Paul. "Cotton is doing the most work on the price side." Emslie says that as of mid-December, the most probable price for the nearby Kansas City wheat contract in March is $8.48/bu., up from November's three-month outlook for $7.60.

Canadian Wheat Board market analyst Neil Townsend says wheat prices surged despite a lack of what he calls extraordinary demand. He thinks the most likely source of extraordinary demand for 2011-12 is Iran. "It's dry there now, and they just got their crop in. When they do import, it tends to be in significant amounts," he says.

The U.S. ethanol blenders' tax credit gives a big boost to wheat prices for calendar year 2011. "So in 2011, ethanol producers likely will produce as much as they can to collect on that credit," he says.

U.S. winter wheat went into dormancy with only 47% of the crop rated good to excellent at the end of November. "It will be a challenge to find perfect weather to improve it when the crop breaks dormancy," says Tim Hannagan, analyst at PFGBest, Chicago. He expects high-protein milling wheat to stay tight.

For cotton, the surge in farm prices from less than 50 cents cents to more than $1/lb. likely will pull 1 million to 2 million acres back into cotton this year.

"It's just amazing how fast we have gone from feast to famine," says Jobe Moss, broker at Moss Capital Management in Lubbock, Texas. "In 2009, we didn't consume textiles. As we moved further down the road, we found we still needed underwear and shirts. We have created tremendous, pent-up demand, coupled with the continuing emergence of China and India." Industry buying habits have changed. "We have been moving from just-in-time buying to planning for a rainy day. I think that has created demand across all fronts for commodities." Now index funds with no position limits have put cotton and other commodities on their buying lists.

Moss expects cotton prices to be volatile, mainly in a range of 75 cents to $1 for the next two years. "But even though it's going to be volatile, at $500 per bale, you get two or three of these per acre, and irrigated farmers will grow three or four bales per acre," says Moss. "You're talking about making a lot of money."